‘Set up HK holding company first’

Philippine companies looking to expand their businesses into China may well consider setting up a holding company first in Hong Kong or Singapore, rather than investing directly from the Philippines, the head of the local office of global professional services firm PricewaterhouseCoopers (PwC) said.

“There are some disadvantages to investing directly from the Philippines,” PwC Philippines Chairman and Senior Partner Alexander Cabrera said in a speech addressing the Manila Times Business Forum in Makati City last week.

He said the basic tax rate on worldwide income, dividends, and royalties for Philippine companies is 30 percent.

Cabrera’s speech focused on “investment structures and exit strategies from a tax perspective,” including the management of intellectual property and the use of shared service entities.

His presentation complemented that of Scott Qian, director of PwC China, who discussed the overall investment environment in the Asian economic powerhouse in terms of recent initiatives of the Chinese government to attract more foreign investors and reduce state control of some industries.

Reducing taxes on profits, dividends
“The tax treaty between the Philippines and China does allow credits for taxes paid in China that could reduce some of the liability here to 15 percent, but there are some gaps,” particularly in the handling of income from dividends, Cabrera added.

For instance, dividends are not taxed in Hong Kong or Singapore, which simplifies tax filing and payments for shareholders.

As another example of an advantage that could be gained by setting up an intermediary for investment in China versus investing in a single step from the Philippines, Cabrera pointed out that China does not impose an improperly accumulated earnings tax (IAET), whereas the Philippines does, at a rate of 10 percent.

This, he said, could complicate the structuring of investments for Philippine companies expanding into China due to the limitations the latter places on repatriation of earnings.

Managing intangible assets
While stressing that there is no ‘one size fits all’ approach to structuring investments in China, Cabrera explained: “One advantage of setting up a holding company is that, depending on your company’s particular circumstances, most of your intangibles could be shifted to the intermediary, which might allow you additional financial flexibility, or to take advantage of some tax benefits that are not available in the Philippines.”

For example, some intangible assets that would not ordinarily be subject to amortization, if carried directly by the parent company, could be if transferred to an intermediary.

“Setting up an intermediary can also help with developing a good exit strategy,” Cabrera added, explaining that this could lower the tax liability on asset sales. He cautioned, however, that the ownership and disposal of intellectual property must be carefully organized when initially developing the investment structure to prevent possible unintended losses later.